Consider a security of which we expect to pay a constant dividend of $18.49 in perpetuity....
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Consider a security of which we expect to pay a constant dividend of $18.49 in perpetuity. Furthermore, its expected rate of return is 20.1%. Using the equation for present value of a perpetuity, we know that the price of the security ought to be Price = D/k, where D is the constant dividend and k is the expected rate of return. Assume that the risk-free rate is 3%, and the market risk premium is 6.4%. What will happen to the market price of the security if its correlation with the market portfolio doubles, while all other variables, including the dividend, remain unchanged? Consider a security of which we expect to pay a constant dividend of $18.49 in perpetuity. Furthermore, its expected rate of return is 20.1%. Using the equation for present value of a perpetuity, we know that the price of the security ought to be Price = D/k, where D is the constant dividend and k is the expected rate of return. Assume that the risk-free rate is 3%, and the market risk premium is 6.4%. What will happen to the market price of the security if its correlation with the market portfolio doubles, while all other variables, including the dividend, remain unchanged?
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Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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